Daily FINANCIAL CRISIS CAPSULE: Too BIG TO JAIL?,CEOS AS ALIENS, “Smoking Gun” Bank Memo

March 30th, 2010 - by: danny

Robert Reich, Fraud, Fraud, Fraud On The Street

Bill Black: To Own A County, Rob a Bank

The reality of pervasive fraud is FINALLY surfacing in more reports and columns on economic issues. Disinfo will be releasing my film PLUNDER THE CRIME OF OUR TIME on DVD on April 6th. I am hoping Mediachannel readers will organize screenings and help make this issue much bigger than it has been. Why is this taking so long?

WP: Worker Productivity Said To Be Holding Back Job Creation

Financial Times: CEOs as ALIENS

CEOs risk being seen as ‘aliens’ over pay

Top executives “risk being treated as aliens” by politicians and the public because their pay is so out of step with that of the population at large, the head of the UK’s largest business organisation warned on Tuesday night.

Bloomberg: More On Rio Tinto Exec Conviction In China

The distortion of China’s so-called judicial processes by all concerned has seldom been more apparent than in the case of the Australia-based Rio Tinto mining giant and its China-based executives, who now face jail terms of seven to 14 years for corruption and theft of commercial secrets.

But at least the mainstream media seem willing to comment on these issues rather than be cowed by contempt and other actions that continue to give Singapore’s kangaroo courts a veneer of credibility. Even the Hong Kong-based South China Morning Post, owned by billionaire Robert Kuok. with his massive investments on the mainland, chose to headline its comment on the Rio case: “Sham trial does more harm than good, again”.

Maybe China will learn from the Rio experience that it should also follow the Lee Kuan Yew example and go after any foreign media that sets foot in its territory after commenting so critically on these politically inspired show trials. Maybe the Chinese princelings will likewise one day go after the Financial Times, which on the day of the Rio verdict ran a full page feature on the massive wealth accumulation and prime positions of various sons and daughters of past political leaders. This is the same newspaper that two years ago groveled before the Lee family for daring to mention that the chief executive of Temasek Holdings was the wife of the prime minister and daughter-in-law of Lee Kuan Yew.

But it is not just China that looks bad as a result of this episode. Rio’s chief executive Tom Albanese seems to have been in a huge hurry to patch up commercial relations with China even perhaps at the cost of more years in jail for his former employees, Australian Chinese Stern Hu and his three mainland underlings.

THE BIGGER PICTURE: WESTERN CIVILIZATION AND THE ECONOMIC CRISIS

We are entering into the era of the ‘Post-Industrial Revolution’, a ‘class cleansing’ of the western world. The entire socio-political economic landscape is being redrawn and reorganized. The effects will be felt from the wallet to the family unit, itself.

WHY ARE ALL THE HONEYBEES DYING? SCIENTISTS WONDER WHY AND WORRY ABOUT FOOD SUPPLY

Bill Clinton’s Mea Culpa

“Smoking Gun” Bank Lobby Memo

Elizabeth Warren catches a major flip-flop by the chief banker lobby ABA, demolishing its credibility, in Politico oped: “…the ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection-exactly the opposite of its position today. This 2006 memo illustrates the ABA’s real consistency- consistent opposition to meaningful reform. If there is a smoking gun in the battle over financial regulatory reform, the 2006 ABA memo is it.”

Rortybomb rejects flawed premise of Dodd bill, that regulators just need “a bit more power”: “I don’t like the idea of the Saving the World Forever approach to financial reform for three reasons: (1) I don’t think it’ll work. The biggest banks are all bigger now, and I worry they may even be emboldened … (2) We are in a lot of trouble if this goes bad and we have another financial crisis in 6-8 years. (3) There are alternatives … that involve stricter rules, better regulation of derivatives, smarter resolution authority, etc”

No one in Washington will say how much money banks should be required to have on hand, reports NYT’s Andrew Sorkin: “Conspicuously absent from any regulatory legislation floating around Capitol Hill is the precise level of capital that banks should hold for every dollar they lend, called a capital ratio … when the fight over financial re-regulation is complete, the next big battle between Wall Street and Washington will be over capital ratios and liquidity … try pinning down Mr. Geithner, or anyone else in the Beltway, on how much capital banks should be required to keep … and certainties disappear.”

Washington’s Blog: DOES DODD GET IT?

On March 3rd, Richard Fisher — President of the Federal Reserve Bank of Dallas — told the Council on Foreign Relations:

A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability – the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009.

The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. First, they are sprawling and complex – so vast that their own management teams may not fully understand their own risk exposures. If that is so, it would be futile to expect that their regulators and creditors could untangle all the threads, especially under rapidly changing market conditions. Second, big banks may believe they can act recklessly without fear of paying the ultimate penalty. They and many of their creditors assume the Fed and other government agencies will cushion the fall and assume the damages, even if their troubles stem from negligence or trickery. They have only to look to recent experience to confirm that assumption.

Some argue that bigness is not bad, per se. Many ask how the U.S. can keep its competitive edge on the global stage if we cede LFI territory to other nations – an argument I consider hollow given the experience of the Japanese and others who came to regret seeking the distinction of having the world’s biggest financial institutions. I know this much: Big banks interact with the economy and financial markets in a multitude of ways, creating connections that transcend the limits of industry and geography. Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter, leading to a downward spiral of bad loans and contracting credit that destroys many jobs and many businesses.

The dangers posed by TBTF banks are too great. To be sure, having a clearly articulated “resolution regime” would represent steps forward, though I fear they might provide false comfort in that a special resolution treatment for large firms might be viewed favorably by creditors, continuing the government-sponsored advantage bestowed upon them. Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size – more manageable for both the executives of these institutions and their regulatory supervisors. I align myself closer to Paul Volcker in this argument and would say that if we have to do this unilaterally, we should. I know that will hardly endear me to an audience in New York, but that’s how I see it. Winston Churchill said that “in finance, everything that is agreeable is unsound and everything that is sound is disagreeable.” I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders. And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis.

Fisher joints many other top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion, including:

* Nobel prize-winning economist, Joseph Stiglitz

* Nobel prize-winning economist, Ed Prescott

* Former chairman of the Federal Reserve, Alan Greenspan

* Former chairman of the Federal Reserve, Paul Volcker

* Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard

* Simon Johnson (and see this)

* President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

* Deputy Treasury Secretary, Neal S. Wolin

* The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

* The Congressional panel overseeing the bailout (and see this)

* The head of the FDIC, Sheila Bair

* The head of the Bank of England, Mervyn King

* The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

* Economics professor and senior regulator during the S & L crisis, William K. Black

* Economics professor, Nouriel Roubini

* Economist, Marc Faber

* Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

* Economics professor, Thomas F. Cooley

* Former investment banker, Philip Augar

* Chairman of the Commons Treasury, John McFall

Even the Bank of International Settlements — the “Central Banks’ Central Bank” — has slammed too big to fail. As summarized by the Financial Times:

Newsweek: When Congress Doesn’t Do its Job

FT: SEC launches ‘Repo 105′ probe

US regulators on Monday asked more than 20 financial groups whether they engaged in transactions along the lines of “Repo 105″ — an accounting device that helped Lehman Brothers conceal its high leverage ratio during the financial crisis

Consumer Spending will Drop Says Roubini

…Given the underlying weakness in wage and asset income together with further room for balance sheet repair, consumer spending is expected to weaken in H2 2010 with the fading of temporary government support to income, and the personal savings rate is likely to trend higher.

The News Dissector